Corporate Finance (Quiz 1-8)

Pavlak Surveyors has beginning current assets of $1,360, beginning current liabilities of $940, ending current assets of $1,720, and ending current liabilities of $1,080. What is the change in net working capital? A. $220 B. $190 C. $170 D. $1,060 E. $940

A. $220 Change in NWC = (End Current Assets - Beg Current Assets) - (End Current Liabilities - Beg Current Liabilities) Change in NWC = (1720-1360) - (1080-940) Change in NWC = 220

You purchased an item costing $6,379 on April 5. The terms of sale were 1/7, net 15. What is the last day you can pay the discounted price? A. April 11 B. April 6 C. April 12 D. April 22 E. April 28

C. April 12 Last day for discount = April 5 + 7 days = April 12

A strength of the average accounting return (AAR) method of project analysis is the fact that AAR: A. uses a cutoff rate. B. considers the time value of money. C. ignores the issue of taxes. D. is based on accounting values. E. is easy to calculate.

E. is easy to calculate.

The Well Derrick has 6.3 percent preferred stock outstanding that sells for $57 per share. This stock was originally issued at $45 per share and has a stated value of $100 per share. What is the cost of preferred stock if the relevant combined tax rate is 23 percent? A. 11.05% B. 10.94% C. 11.22% D. 11.37% E. 10.45%

A. 11.05%

Webster's has sales of $798,000 and a profit margin of 6.8 percent. The annual depreciation expense is $82,600. What is the amount of the operating cash flow if the company has no long-term debt? A. $104,760 B. $136,864 C. $22,160 D. −$28,336 E. $54,264

B. $136,864 Sales (649,000) * Profit margin (.072) = Net income (46,728)+ Depreciation (102,600) = 149,328 OCF

Hello Robin! has accounts receivable of $4,511, inventory of $1,810, sales of $138,609, and cost of goods sold of $64,003. How many days does it take the firm to sell its inventory and collect the payment on the sale assuming that all sales are on credit? A. 18.67 days B. 22.20 days C. 11.88 days D. 16.23 days E. 14.50 days

B. 22.20 days Days in inventory = 365 / (COGS / INV) Days in inventory = 365 / ($64,003 / $1,810) = 10.322 days Days sales in receivables = 365 / (sales / accounts receivable) Days' sales in receivables = 365 / ($138,609 / $4,511) = 11.879 days Total days in inventory and receivables = 10.322 + 11.879 = 22.20 days

The Dry Well has 6.85 percent preferred stock outstanding with a market value per share of $79, a stated value of $100 per share, and a book value per share of $29. What is the cost of preferred stock? A. 9.00% B. 8.67% C. 9.29% D. 8.88% E. 8.50%

B. 8.67% RP = .0685($100)/$79 RP = .0867, or 8.67%

Alicia is considering adding toys to her gift shop. She estimates the cost of new inventory will be $9,500 and remodeling expenses will be $850. Toy sales are expected to produce net cash inflows of $1,300, $4,900, $4,400, and $4,100 over the next four years, respectively. Should Alicia add toys to her store if she assigns a 3-year payback period to this project? Why or why not? A. Yes; The payback period is 3.94 years. B. Yes; The payback period is 2.94 years. C. No; The payback period is 2.94 years. D. Yes; The payback period is 3.09 years. E. No; The payback period is 3.94 years.

B. Yes; The payback period is 2.94 years.

When determining a firm's cost of capital, the most important determinant is the: A. debt-equity ratio of any new funds raised. B. use of the funds raised. C. pretax cost of equity. D. aftertax cost of equity. E. marginal tax rate.

B. use of the funds raised.

Paradise Travels is an all-equity firm that has 9,000 shares of stock outstanding at a market price of $27 per share. Management has decided to issue $25,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 7.3 percent. What are the earnings per share at the break-even level of earnings before interest and taxes? Ignore taxes. A. $1.67 B. $2.28 C. $1.97 D. $1.92 E. $2.12

C. $1.97

Hatch Idea Labs purchased some equipment two years ago for $287,600. These assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576, for Years 1 to 6, respectively. The company is currently replacing this equipment so the old equipment is being sold for $150,000. What is the aftertax salvage value from this sale if the tax rate is 21 percent and no bonus depreciation is claimed? A. $144,433.20 B. $142,311.12 C. $147,490.08 D. $149,000.00 E. $154,183.20

C. $147,490.08

Which one of the following is a graphical representation of the operating and cash cycles? A. Customer service line B. Inventory flow chart C. Cash flow time line D. Operations line E. Production period

C. Cash flow time line

Which firm is most apt to have the shortest inventory period? A. Hardware store B. Furniture store C. Delicatessen D. Locomotive manufacturer E. General merchandise retail store

C. Delicatessen

Carrillo Trophies has a new project with an initial equipment cost of $148,000 and a life of 10 years. The firm generally uses straight-line depreciation to a book value of zero over the equipment's life. If the firm opts instead to use the bonus depreciation method, and has a tax rate of 21 percent, what is the depreciation tax shield amount for the first year? A. $3,108 B. $1,169 C. $11,692 D. $31,080 E. $14,800

D. $31,080

Humphries has cash of $10,000, accounts receivable of $2,500, accounts payable of $900, and inventory of $1,200. What is the value of the quick ratio? A. 15.22 B. 12.89 C. 14.22 D. 9.12 E. 13.89

E. 13.89 Quick Ratio (Acid Test Ratio) = (cash equivalents + accounts receivable) / current liabilities Quick Ratio = (10000+2500) / 900 QR = 13.89

The Shoe Tree currently has an operating cycle of 199 days and a cash cycle of 54 days. The company is implementing some changes that will reduce the inventory period by 11 days, decrease the receivables period by 6 days, and decrease the accounts payable period by 4 days. How many days will be in the new cash cycle once all of these changes become effective? A. 45 days B. 33 days C. 38 days D. 35 days E. 41 days

E. 41 days New cash cycle = 54 -11 -6 + 4 = 41 days

A company that has a(n) ________ would be most likely to have a high percentage of debt in its optimal capital structure. A. very low marginal tax rate B. substantial level of tax shields from other sources C. exceptionally high level of depreciation expense D. minimal level of taxable income E. Low probability of financial distress

E. Low probability of financial distress

A potential merger that produces synergy: A. reduces the anticipated net income from the target firm. B. should be rejected because the synergy will dilute the benefits of the merger. C. should be rejected due to the projected negative cash flows. D. has a net present value of zero. E. creates value and therefore should be pursued.

E. creates value and therefore should be pursued.

Ehlinger Investments announced today that it has acquired all of the assets and liabilities of Thompson Equity. The combined firm will be known as Ehlinger Investments; Thompson Equity no longer exists as a separate entity. This acquisition is best described as a: A. consolidation. B. divestiture. C. tender offer. D. spinoff. E. merger.

E. merger.

The economic order quantity (EOQ) is best defined as the: A. minimum amount that must be ordered to obtain the quantity discount. B. minimum size of an order needed to qualify for free shipping. C. minimal amount of inventory that must be purchased to receive a cash discount. D. number of items that are sold on average each month. E. restocking quantity that minimizes the total cost of inventory.

E. restocking quantity that minimizes the total cost of inventory.

KN&J expects its EBIT to be $147,000 every year forever. The company currently has no debt but can borrow at 7.6 percent while its cost of equity is 14.6 percent. The tax rate is 21 percent. What will be the value of the company if it borrows $40,000 and uses the loan proceeds to repurchase shares? A. $803,811 B. $606,667 C. $681,588 D. $646,667 E. $654,452

A. $803,811

Which one of the following is a primary benefit of implementing zero-balance accounts into a cash management system? A. Additional cash availability B. Decreased collection float C. Elimination of all float D. Increased disbursements float E. Total elimination of all safety stocks

A. Additional cash availability

The cash cycle equals the: A. inventory period plus the accounts payable period. B. operating cycle minus the accounts payable period. C. operating cycle minus the inventory period. D. operating cycle minus the accounts receivable period. E. inventory period plus the accounts receivable period.

B. operating cycle minus the accounts payable period.

Suppose MMP changes its policy and starts requiring all of its customers to pay within 20 days rather than the 30 days that it currently allows. Which one of the following will result from this change? A. Increase in receivables period B. Increase in operating cycle C. Increase in accounts payable period D. Decrease in cash cycle E. Increase in inventory period

D. Decrease in cash cycle

Myers Storage purchased a parcel of land four years ago at a cost of $112,600. Today, the land has a market value of $136,600. At the time of the purchase, the company spent $8,400 to grade the land and another $11,500 to install electrical access. The company now wants to build a new facility on the site at an estimated cost of $522,700. What amount should be used as the initial cash flow for this project? A. −$679,200 B. −$542,600 C. −$655,200 D. −$659,300 E. −$522,700

D. −$659,300

Alpha Corporation has total earnings of $49,000, a market value per share of $64, a book value per share of $38, and has 25,000 shares outstanding. Beta, Incorporated, has total earnings of $34,000, a market value per share of $21, a book value per share of $12, and has 22,000 shares outstanding. Assume Alpha acquires Beta by paying cash for all the shares outstanding at a merger premium of $2 per share. Also assume neither firm has any debt before or after the merger. What is the value of the total equity of the combined firm, AlphaBeta, if the purchase method of accounting is used? A. $1,456,000 B. $1,412,000 C. $1,274,000 D. $1,316,000 E. $1,427,000

A. $1,456,000

Hossain, Incorporated, has offered $179 million cash for all of the common stock of Tower Corporation. Based on recent market information, Tower is worth $175 million as an independent operation. If the merger makes economic sense for Hossain, what is the minimum estimated value of the synergistic benefits from the merger? A. $4 million B. $0 C. $1 million D. $3 million E. $5 million

A. $4 million

Southern Fried Chick'n has estimated quarterly sales for next year, starting with Quarter 1, of $38,200, $41,300, $79,700, and $32,900.The accounts receivable period is 11 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days. A. $5,047.78 B. $15,143.33 C. $4,668.89 D. $10,603.10 E. $14,006.67

A. $5,047.78 Q2 accounts receivable balance = (11/90) ×$41,300 = $5,047.78

Consider a project with an initial asset cost of $168,000. The asset will be depreciated to zero over seven years using straight-line depreciation. Ignore bonus depreciation. At the end of the project's four-year life the asset can be sold for $65,000. Given a combined federal and state tax rate of 24 percent, what is the aftertax salvage value of the asset? A. $66,680 B. $65,500 C. $68,100 D. $62,550 E. $66,050

A. $66,680

Delta Lighting has 24,500 shares of common stock outstanding at a market price of $19 per share. This stock was originally issued at $21 per share. The firm also has a bond issue outstanding with a total face value of $250,000 which is selling for 94 percent of par. The cost of equity is 12.6 percent while the aftertax cost of debt is 5.8 percent. The firm has a beta of 1.33 and a tax rate of 23 percent. What is the weighted average cost of capital? A. 10.32% B. 12.36% C. 11.47% D. 10.07% E. 11.29%

A. 10.32%

A project has cash flows of -$343,200, $56,700, $138,500, and $245,100 for Years 0 to 3, respectively. The required rate of return is 10.5 percent. Based on the internal rate of return of _____ percent for this project, you should _____ the project. A. 10.93; accept B. 8.03; reject C. 11.03; accept D. 9.87; reject E. 10.47; reject

A. 10.93; accept NPV = 0 = -$343,200 + $56,700/(1 + IRR) + $138,500/(1 + IRR)2 + $245,100/(1 + IRR)3 use financial calculator IRR = .1093, or 10.93% ACCEPT

Stock in Country Road Industries has a beta of 1.62. The market risk premium is 8.2 percent while T-bills are currently yielding 2.9 percent. Country Road's last paid annual dividend was $1.87 per share and dividends are expected to grow at an annual rate of 3.8 percent indefinitely. The stock sells for $25 per share. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model? A. 13.87% B. 13.38% C. 14.06% D. 14.23% E. 14.50%

A. 13.87%

Phillips Equipment has 6,500 bonds outstanding that are selling at 96.5 percent of par. Bonds with similar characteristics are yielding 6.7 percent, pretax. The company also has 48,000 shares of 5.5 percent preferred stock and 75,000 shares of common stock outstanding. The preferred stock sells for $64 per share. The common stock has a beta of 1.32 and sells for $41 per share. The preferred stock has a stated value of $100. The U.S. Treasury bill is yielding 2.2 percent and the return on the market is 10.6 percent. The corporate tax rate is 21 percent. What is the weighted average cost of capital? A. 8.09% B. 9.30% C. 10.56% D. 8.64% E. 10.18%

A. 8.09% Assuming face value of bond to be $1,000 Price of bond = 0.965 * 1000 = 965 Market value of bond = 6,500 * 965 = 6,272,500 Market value of preferred stock = 48,000 * 64 = 3,072,000 Market value of common stock = 75,000 * 41 = 3,075,000 Total market value = 6,272,500 + 3,072,000 + 3,075,000 = 12,419,500 Annual preferred dividend = 0.055 * 100 = 5.5 Cost of preferred stock = (Annual dividend / price) * 100 Cost of preferred stock = (5.5 / 64) * 100 Cost of preferred stock = 8.5938% Cost of equity = Risk free rate + beta (market return - risk free rate) Cost of equity = 0.022 + 1.32 (0.106 - 0.022) Cost of equity = 0.13288 or 13.288% The weighted average cost of capital = (Weight of debt)*(after tax cost of debt) + (weight of preferred stock)*(cost of preferred stock) + (weight of equity)*(cost of equity) Weighted average cost of capital = (6,272,500 / 12,419,500) 0.067(1 - 0.21) + (3,072,000 / 12,419,500)0.085938 + (3,075,000 / 12,419,500)0.13288 Weighted average cost of capital = 0.02673 + 0.02126 + 0.0329 The weighted average cost of capital = 0.0809 or 8.09%

You are considering two mutually exclusive projects. Project A has cash flows of −$72,000, $21,400, $22,900, and $56,300 for Years 0 to 3, respectively. Project B has cash flows of −$81,000, $20,100, $22,200, and $74,800 for Years 0 to 3, respectively. Both projects have a required 2.5-year payback period. Should you accept or reject these projects based on payback analysis? A. Accept Project A and reject Project B B. You cannot apply the payback method to these projects. C. Accept both Projects A and B D. Reject Project A and accept Project B E. Reject both Projects A and B

A. Accept Project A and reject Project B

Which one of the following defensive tactics is designed to prevent a "two-tier" takeover offer? A. Fair price provision B. Shark repellent C. Poison put D. Bear hug E. Dual class capitalization

A. Fair price provision

Which of these actions is indicative of a restrictive short-term financial policy? A. Minimizing the cash balances held by the firm B. Granting increasing amounts of credit to customers C. Expanding the number of inventory items carried D. Investing relatively large amounts in marketable securities E. Increasing the firm's investment in the current accounts

A. Minimizing the cash balances held by the firm

Drinkable Water Systems is analyzing a project with projected cash flows of $127,400, $209,300, and -$46,000 for Years 1 to 3, respectively. The project costs $251,000 and has been assigned a discount rate of 12.5 percent. Should this project be accepted based on the discounting approach to the modified internal rate of return? Why or why not? A. No; The MIRR is 11.33 percent. B. No; The MIRR is 11.85 percent. C. Yes; The MIRR is 11.85 percent. D. No; The MIRR is 11.68 percent. E. Yes; The MIRR is 11.33 percent.

A. No; The MIRR is 11.33 percent

Which one of the following will generally have the highest priority when assets are distributed in a bankruptcy proceeding? A. Payment of employees' wages B. Consumer claims C. Company contribution to the employees' retirement account D. Dividend payment to preferred shareholders E. Payment to an unsecured creditor

A. Payment of employees' wages

A furniture store is considering adding kitchen appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? A. Selling furniture to appliance customers B. Using the store's billing system for appliance sales C. Having the current store manager also oversee appliance sales D. Moving furniture to provide floor space for the appliances E. Paying the rent for the store

A. Selling furniture to appliance customers

Which of these is the best example of a raw material? A. Set of tires for an automaker B. Can of paint waiting to be sold C. Completed product awaiting customer delivery D. Cabinets ready to be shipped E. Partially assembled airplane

A. Set of tires for an automaker

As of 2018, firms can take a "bonus" depreciation deduction of 100 percent of the cost of an eligible asset in the year the asset was purchased. If a firm elects to take the bonus depreciation instead of using MACRS depreciation, the project's Year 1 operating cash flow will _______ in the amount of ________. A. increase; the depreciation expense times the tax rate B. increase; the reduction in depreciation expense C. decrease; the additional depreciation expense times the tax rate D. decrease; the reduction in depreciation expense E. decrease; the additional depreciation expense

A. increase; the depreciation expense times the tax rate

The Warehouse has projected sales for June through September of $56,700, $68,900, $70,200, and $54,300.The company collects 46 percent of its sales in the month of sale, 51 percent in the month following the month of sale, and 2 percent in the second month following the month of sale. The remaining sales are never collected. What is the amount of the August collections? A. $62,158 B. $68,565 C. $65,863 D. $67,288 E. $65,516

B. $68,565 September collections = (.46 ×$70,200) + (.51 ×$68,900) + (.02 ×$56,700) = $68,565

A project has an initial cost of $52,700 and a market value of $61,800. What is the difference between these two values called? A. Profitability index B. Net present value C. Discounted payback D. Payback value E. Accounting return

B. Net present value

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following? A. Change in net working capital B. Tax due on the current salvage value of that asset C. Depreciation tax shield D. Current year's operating cash flow E. MACRS depreciation for the current year

B. Tax due on the current salvage value of that asset

Ellis-Clay is replacing a machine that has worn out. The replacement machine will not impact sales or operating costs and will not have any salvage value at the end of its five-year life. The firm has a tax rate of 22 percent, uses straight-line depreciation over an asset's life, ignores bonus depreciation options, and has a positive net income. Given this, which one of the following statements is correct? A. The new machine creates erosion effects. B. The new machine will generate positive operating cash flows. C. The new machine will create a cash outflow when the firm disposes of the machine at the end of its life. D. The new machine will have a zero rate of return. E. As a project, the new machine has a net present value equal to minus one times the machine's purchase price.

B. The new machine will generate positive operating cash flows.

A company has the following account balances. Which statement is correct concerning these balances? Accounts Receivable (BegBalance) : $16,400 Accounts Receivable (EndBalance) : $17,800 Accounts Payable (BegBalance) : $20,300 Accounts Payable (EndBalance) : $24,400 Inventory (Begbalance) : $63,600 Inventory (Endbalance) : $60,100 Long term Debt (Begbalance) : $127,500 Long term Debt (Endbalance) : $125,800 Common Stock (Begbalance) : $212,400 Common Stock (Endbalance) : $215,900 A. Long-term debt is a $1,700 source of cash. B. Total debt is a $2,400 source of cash. C. Common stock is a $3,500 use of cash. D. Net working capital, excluding cash, is a $6,100 use of cash. E. Accounts receivable is a $1,400 source of cash.

B. Total debt is a $2,400 source of cash. Total debt increased from $147,800 to $150,200 which is a $2,400 source of cash.($24,400 + 125,800) - ($20,300 + 127,500) = $2,400

Which one of the following statements related to Chapter 7 bankruptcy is correct? A. Chapter 7 bankruptcies are always involuntary on the part of the firm. B. Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated. C. Under a Chapter 7 bankruptcy, the claims of creditors are paid prior to the administrative costs of the bankruptcy. D. A company in Chapter 7 bankruptcy is reorganizing its operations such that it can return to being a viable concern. E. Chapter 7 bankruptcy allows a firm to restructure its equity such that new shares of stock can be issued.

B. Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated.

Cash concentration is best defined as: A. combining a firm's bills so that disbursement checks are mailed only monthly. B. combining cash from multiple bank accounts into a firm's main bank accounts. C. using multiple lockboxes for collecting cash payments. D. combining an entire firm's daily receipts into one bank deposit. E. combining a week's worth of cash receipts into one bank deposit.

B. combining cash from multiple bank accounts into a firm's main bank accounts.

James Fashions has a target debt-equity ratio of .52. Its cost of equity is 14.5 percent and its pretax cost of debt is 8 percent. Its combined tax rate is 22 percent. What is the company's WACC? A. 12.28% B. 7.10% C. 11.67% D. 10.14% E. 9.07%

C. 11.67%

A sole proprietorship: A. is taxed the same as a C corporation. B. can generally raise large sums of capital quite C. has a limited life. D. can transfer ownership of the firm more easily than a corporation can. E. is the most regulated form of organization.

C. has a limited life.

The existence of ________ makes the capital structure of a company irrelevant. A. the interest tax shield B. a debt-equity ratio that is greater than 0 but less than 1 C. homemade leverage D taxes E. a 100 percent dividend payout ratio

C. homemade leverage

A bill given to a customer for goods he or she purchased is called a(n): A. account reconciliation. B. docket. C. invoice. D. shipping receipt. D. remittance advice.

C. invoice.

As of this morning, a firm had a ledger balance of $684 with no outstanding deposits or checks. Today, the firm deposited six checks in the amount of $49 each and wrote a check in the amount of $283. What is the amount of the collection float as of the end of the day assuming none of these checks had cleared? A. $474 B. $283 C. $11 D. $294 E. $978

D. $294 Collection float = 6 ×$49 = $294

L.A. Clothing has expected earnings before interest and taxes of $63,300, an unlevered cost of capital of 14.7 percent, and a combined tax rate of 23 percent. The company also has $11,000 of debt that carries a coupon rate of 7 percent. The debt is selling at par value. What is the value of this company? A. $273,333 B. $284,108 C. $342,579 D. $334,101 E. $305,476

D. $334,101

The Grain and Feed Store purchases are equal to 68 percent of the following quarter's sales. The accounts receivable period is 15 days and the accounts payable period is 30 days. Assume there are 30 days in each month. The store has estimated quarterly sales for the next year, starting with Quarter 1, of $16,750, $18,220, $17,560, and $19,710, respectively. How much will the store owe its suppliers at the end of Quarter 3? A. $4,300.27 B. $3,807.40 C. $4,508.10 D. $4,467.60 E. $3,992.20

D. $4,467.60 Accounts payable balance Q3 = 30/90(.68 ×$19,710) = $4,467.60

Outdoors Woods has annual credit sales of $14.38 million. The average collection period is 12 days. What is the average investment in accounts receivable as shown on the balance sheet? Assume a 365-day year. A. $408,888 B. $446,000 C. $524,000 D. $472,767 E. $393,134

D. $472,767 Average accounts receivable = $14,380,000/365 ×12 = $472,767

Westover's has an average collection period of 31 days. Its average daily investment in accounts receivables is $51,068. What are its annual credit sales? Assume a 365-day year. A. $419,737 B. $527,272 C. $614,414 D. $601,285 E. $450,200

D. $601,285 Average collection period = ($51,068/31)(365) = $601,285

Fun Stores has to restock a popular electronic game every three days as it completely sells out in that period of time. What is the inventory turnover rate for this game? A. 118.33 times B. 105.25 times C. 115.00 times D. 121.67 times E. 99.68 times

D. 121.67 times Inventory turnover = 365/3 = 121.67 times

A project produces annual net income amounts of $8,200, $17,800, and $20,900 over its 3-year life. The initial cost is $198,900, which is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 14.5 percent? A. 16.84% B. 16.67% C. 18.98% D. 15.72% E. 17.25%

D. 15.72% Average Accounting Rate: (sum of cash flows / initial investment) / years of investment AAR: [($8,200 + 17,800 + 20,900)] / ($198,900 + 0) / 2 AAR = .1572 or 15.72%

Which of these activities is a source of cash? A. Repurchasing shares of stock B. Decreasing long-term debt C. Increasing inventory D. Decreasing accounts receivable E. Increasing fixed assets

D. Decreasing accounts receivable

Which one of the following actions by a financial manager is most apt to create an agency problem? A. Agreeing to pay bonuses based on the market value of the company's stock rather than on its level of sales B. Refusing to borrow money when doing so will create losses for the firm C. Refusing to lower selling prices if doing so will reduce the net profits D. Increasing current profits when doing so lowers the value of the company's equity E. Refusing to expand the company if doing so will lower the value of the equity

D. Increasing current profits when doing so lowers the value of the company's equity

Which one of the following is a direct cost of bankruptcy? A. Losing a key company employee B. Maintaining a debt-equity ratio that is lower than the optimal ratio C. Bypassing a positive NPV project to avoid additional debt D. Paying an outside accountant to prepare bankruptcy reports E. Investing in cash reserves

D. Paying an outside accountant to prepare bankruptcy reports

The length of time a retailer owes its supplier for an inventory purchase is called the: A. cash cycle. B. operating cycle. C. inventory period. D. accounts payable period. E. accounts receivable period.

D. accounts payable period.

An increase in the accounts receivable period is most apt to: A. shorten the accounts payable period. B. shorten the operating cycle. C. lengthen the accounts payable period. D. lengthen the cash cycle. E. shorten the inventory period.

D. lengthen the cash cycle.

Credit scoring is the: A. categorizing of customers into groups based on the length of time it takes each customer to pay for purchases. B. tracking of both the number and the size of customer orders over a period of time. C. evaluation of the opportunity costs of a credit policy. D. process of quantifying the probability of default when granting credit to customers. E. compiling of a list of accounts receivables segregated by the length of time each receivable has been outstanding.

D. process of quantifying the probability of default when granting credit to customers.

A project will produce operating cash inflows of $61,000 per year for 10 years in a row. The initial fixed asset investment in the project will be $94,000. The net aftertax salvage value is estimated at $7,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 14.5 percent? A. $313,878 B. −$404,263 C. −$313,878 D. −$76,443 E. $219,878

E. $219,878

At the beginning of the year, Smidovec Plumbing had current liabilities of $15,932 and total debt of $68,847. By year end, current liabilities were $13,870 and total debt was $72,415. What is the amount of net new borrowing for the year? A. −$2,480 B. $3,568 C. −$2,062 D. $4,677 E. $5,630

E. $5,630 Net new borrowing = (EndTD - EndCL) - (BegTD - BegCL) Net new borrowing = ($72,415 − 13,870) − ($68,847 − 15,932) Net new borrowing = $5,630

On May 12, you purchased $6,200 of merchandise from a supplier. The terms of the sale were 2/10, net 20. The discounted amount due is ________ which is payable no later than ________. May has 31 days. A. $3,515; June 1 B. $5,580; May 22 C. $5,960; May 22 D. $2,960; June 1 E. $6,076; May 22

E. $6,076; May 22 Last day for discount = May 12 +10 days = May 22 Discounted price = $6,200 × (1 -.02) = $6,076

Industrial Supply has projected Q1 sales at $38,200, Q2 sales at $44,900, and Q3 sales at $42,300. Purchases equal 69 percent of the next quarter's sales. The accounts receivable period is 30 days and the accounts payable period is 60 days. At the beginning of Q1, the firm has an accounts receivable balance of $11,800 and an accounts payable balance of $23,300. The firm pays $1,600 a month in cash expenses and $800 a month in interest and taxes. At the beginning of the Q1, the cash balance is $500 and the short-term loan balance is zero. During Q1, capital spending will be $2,100. The firm maintains a minimum cash balance of $200. Assume each month has 30 days. What is the cumulative cash surplus (deficit) at the end of Q1, prior to any short-term borrowing? A. $109 B. $360 C. -$983 D. -$91 E. -$560

E. -$560 Q1 collections = $11,800 + (60/90)($38,200) = $37,267 Q1 payments = $23,300 + [(30/90) ×.69 ×$44,900] = $33,627 Net cash flow = $37,267-33,627-1,600 -800 -2,100 = -$860 Q1 cumulative deficit = $500 -860-200 = -$560

When evaluating two mutually exclusive projects, the final decision on which project to accept ultimately depends upon which one of the following? A. Length of each project's life B. Initial cost of each project C. Timing of the cash inflows D. Total cash inflows of each project E. Net present value

E. Net present value

Which one of the following types of costs was incurred in the past and cannot be recouped? A. Erosion B. Incremental C. Opportunity D. Side E. Sunk

E. Sunk

BJ's just reconciled its bank account and has $10,800 in outstanding deposits, $26,300 in checks outstanding, and a positive checkbook balance. The firm sells on a cash-only basis and deposits its receipts at the bank daily. The deposited funds are available to the firm the following day. The firm writes and mails checks on a daily basis also. These checks generally clear the bank in three days. What do you know about the firm's float given this information? A. Since transactions occur daily, the firm has no float. B. The collection float generally exceeds the disbursement float. C. The firm has a net collection float. D. The firm has disbursements float but no collection float. E. The disbursement float generally exceeds the collection float.

E. The disbursement float generally exceeds the collection float.

According to M&M Proposition II, without taxes, which of the following statements is accurate? A. Financial risk is unaffected by the debt-equity ratio. B. The cost of equity remains constant as the debt-equity ratio increases. C. The cost of equity is inversely related to the debt-equity ratio. D. Financial risk determines the return on assets. E. The required return on assets is equal to the weighted average cost of capital.

E. The required return on assets is equal to the weighted average cost of capital.

Pro forma financial statements can best be described as financial statements: A. expressed in real dollars, given a stated base year. B. that express the assets as a percentage of total assets, and the costs as a percentage of sales. C. for which all accounts are expressed as a percentage of last year's values. D. expressed in a foreign currency. E. that state projected values for future time periods.

E. that state projected values for future time periods.

Eastern Markets has no debt outstanding and a total market value of $346,500. Earnings before interest and taxes, EBIT, are projected to be $14,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 13 percent higher. If there is a recession, then EBIT will be 32 percent lower. The firm is considering a debt issue of $16,000 with an interest rate of 6.8 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,500 shares outstanding. Ignore taxes. What will be the percentage change in EPS if the economy enters a recessionary period? A. −30% B. −41% C. −28% D. −32% E. −35%

E. −35%

In a tax-free acquisition, the shareholders of the target firm: A. are viewed as having exchanged shares on a dollar-for-dollar basis. B. sell their shares at cost thereby avoiding the capital gains tax. C. sell their shares to a qualifying entity thereby avoiding both income and capital gains taxes. D. receive income that is considered to be tax-exempt. E. gift their shares to a tax-exempt organization and therefore have no taxable gain.

A. are viewed as having exchanged shares on a dollar-for-dollar basis.

Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the: A. cost of equity. B. income return. C. capital gains yield. D. dividend yield. E. cost of capital.

A. cost of equity.

Riojas, Incorporated, is an all-equity firm with a weighted average cost of capital of 13.3 percent. The current market value of its equity is $4.2 million. Assume there are no taxes. According to M&M Proposition I, what will be the value of the company if it changes to a debt-equity ratio of .62? A. $1,596,000 B. $4,200,000 C. $4,758,600 D. $6,804,000 E. $2,604,000

B. $4,200,000 VL = VE = $4,200,000

A firm has an average collection period of 37 days and factors all of its receivables immediately at a discount of .98 percent. Assume all accounts are collected in full. What is the firm's effective cost of borrowing? A. 9.98 percent B. 10.20 percent C. 10.24 percent D. 10.38 percent E. 10.13 percent

B. 10.20 percent EFF = {1 + [.0098 / (1 - .0098)]}365/37- 1 = .1020, or 10.20 percent

Home & More is considering a project with cash flows of −$368,000, $133,500, −$35,600, $244,700, and $258,000 for Years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 14.6 percent? Why or why not? A. Yes; The MIRR is 12.91 percent. B. Yes; The MIRR is 16.96 percent. C. No; The MIRR is 16.96 percent. D. Yes; The MIRR is 14.78 percent. E. No; The MIRR is 16.96 percent. F. No; The MIRR is 14.78 percent.

B. Yes; The MIRR is 16.96 percent.

Chokhani Textiles is debating between a levered and an unlevered capital structure. The all-equity capital structure would consist of 60,000 shares of stock. The debt and equity option would consist of 45,000 shares of stock plus $250,000 of debt with an interest rate of 7.25 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes. A. $81,400 B. $66,667 C. $72,500 D. $68,200 E. $50,500

C. $72,500

McHatton Worldwide is a diversified firm that operates multiple divisions. It is the only shareholder of a particular wholly owned subsidiary. Management has decided to arrange an IPO to sell 30 percent of the ownership of this subsidiary. Which term applies to this offering? A. Tender offer B. Split-up C. Equity carve-out D. Lockup transaction E. White knight transaction

C. Equity carve-out

Lou Construction is looking at a new system with an installed cost of $411,500. This cost will be depreciated straight-line to zero over the project's seven-year life, at the end of which the system is expected to be sold for $35,000 cash. No bonus depreciation will be taken. The system will save the firm $129,400 per year in pretax operating costs, and the system requires an initial investment in net working capital of $22,500. All of the net working capital will be recovered at the end of the project. The tax rate is 23 percent and the discount rate is 13.2 percent. What is the net present value of this project? A. $84,117.64 B. $107,820.59 C. $40,441.14 D. $51,507.41 E. $105,391.14

A. $84,117.64

Which one of the following statements is correct? A. A firm may benefit from an acquisition if it can lower its capital requirements.. B. The leverage associated with an acquisition increases the tax liability of the acquiring firm. C. If a firm uses its surplus cash to acquire another firm, then the shareholders of the acquiring firm immediately incur a tax liability related to the transaction. D. The IRS automatically approves acquisitions that are primarily designed to lower federal taxes. E. Firms can always benefit from economies of scale if they increase the size of their firm through acquisitions.

A. A firm may benefit from an acquisition if it can lower its capital requirements.

Which statement is correct? A. Disbursement float causes the available balance to exceed the ledger balance. B. Disbursement float is the period of time between a firm making a bank deposit and the funds from that deposit being available to the firm. C. Disbursement float decreases when a check is delayed in the mail due to an extended holiday weekend. D. Disbursement float exists when the available balance is less than the book balance. E. Disbursement float is being totally eliminated by the Check Clearing Act for the 21st Century.

A. Disbursement float causes the available balance to exceed the ledger balance.

Which characteristic applies to commercial paper? A. Issued directly by large-sized firms B. Offerings registered with the SEC C. Issued primarily by low-rated firms D. Interest rates higher than comparable bank loans E. Maturities of 270 days or more

A. Issued directly by large-sized firms

Which characteristic generally applies to commercial paper? A. Unsecured B. Secured by accounts receivable C. Issued only by financial institutions D. Maturities limited to 90 days or less E. Issued only by corporations

A. Unsecured

All other things beings equal, and assuming all ratios have positive values, an increase in current liabilities will: A. decrease the quick ratio. B. increase the current ratio. C. decrease the cash coverage ratio. D. increase the net working capital to total assets ratio. E. increase the cash ratio.

A. decrease the quick ratio.

The primary purpose of a flip-in provision is to: A. dilute a corporate raider's ownership position. B. give the existing corporate directors the sole right to remove a poison pill. C. reduce the market value of each share of stock. D. provide additional compensation to any senior manager who loses his or her job as a result of a corporate takeover. E. increase the number of shares outstanding while also increasing the value per share.

A. dilute a corporate raider's ownership position.

The economic order quantity approach states that inventory order sizes should be determined by: A. equating restocking costs with carrying costs. B. dividing annual item sales by the carrying cost per item and multiplying by 2. C. computing the amount of the derived demand. D. computing the average number of items sold each month. E. dividing the inventory into various groups based on the value per item.

A. equating restocking costs with carrying costs.

A proposed acquisition is most apt to create synergy by: A. increasing the utilization of the acquiring firm's assets. B. disbanding the distribution network of the combined firm. C. increasing the overhead costs. D. decreasing the market power of the combined firm. E. eliminating any strategic advantages of the target firm.

A. increasing the utilization of the acquiring firm's assets.

Assume a firm has a debt-equity ratio of .36. The firm's cost of equity: A. is affected by both a change in the firm's beta and the firm's projected rate of growth. B. equals the company's pretax weighted average cost of capital. C. equals the risk-free rate plus the market risk premium. D. tends to remain static even as the company's level of risk increases. E. increases as the unsystematic risk of the company's stock increases.

A. is affected by both a change in the firm's beta and the firm's projected rate of growth.

Net present value: A. is the best method of analyzing mutually exclusive projects. B. is less useful than the internal rate of return when comparing different-sized projects. C. is the easiest method of evaluation for nonfinancial managers. D. is very similar in its methodology to the average accounting return. E. cannot be applied when comparing mutually exclusive projects.

A. is the best method of analyzing mutually exclusive projects.

The Market Place is considering a new four-year expansion project that requires an initial fixed asset investment of $1.67 million. The fixed asset will be depreciated straight-line to zero over its four-year tax life, after which time it will have a market value of $435,000. No bonus depreciation will be taken. The project requires an initial investment in net working capital of $198,000, all of which will be recovered at the end of the project. The project is estimated to generate $1,850,000 in annual sales, with costs of $1,038,000. The tax rate is 21 percent and the required return for the project is 16.4 percent. What is the net present value? A. $358,576.22 B. $451,180.73 C. $302,208.15 D. $241,334.55 E. $254,595.45

B. $451,180.73

Lamey Company has an unlevered cost of capital of 12.3 percent, a total tax rate of 25 percent, and expected earnings before interest and taxes of $32,840. The company has $60,000 in bonds outstanding that sell at par and have a coupon rate of 7.2 percent. What is the cost of equity? A. 13.94% B. 13.78% C. 14.07% D. 14.29% E. 13.36%

B. 13.78% VU = [$32,840(1 − .25)]/.123 VU = $200,244 VL = $200,244 + .25($60,000) VL = $215,244 VE = $215,244 − 60,000 VE = $155,244 RE = .123 + (.123 − .072)($60,000/$155,244)(1 − .25) RE = .1378 or 13.78%

With respect to evaluating capital projects, which of the following statements is accurate? A. Companies that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play rate. B. A project that is unacceptable today might be acceptable tomorrow given a change in market returns. C. The pure play method is most frequently used for projects involving the growth of a company's current operations. D. Firms should accept low-risk projects prior to funding high-risk projects. E. Making subjective adjustments to a company's WACC when determining project discount rates unfairly punishes low-risk divisions within the company.

B. A project that is unacceptable today might be acceptable tomorrow given a change in market returns.

Which of the following characteristics will tend to cause a firm to adopt a more liberal credit policy?I. Repeat customers II. Excess capacity III. High variable costs IV. Limited competition A. II, III, and IV only B. I and II only C. III and IV only D. I, II, III, and IV E. I, II, and III only

B. I and II only

Which one of the following best defines synergy given the following? VA = Value of Firm A VB = Value of Firm B VAB = Value of merged Firm AB A. Max[(VA + VB) − VAB, 0] B. Max[VAB − (VA + VB), 0] C. Max[VAB − VB, 0] D. VAB − (VA + VB) E. (VA + VB) − VAB

B. Max[VAB − (VA + VB), 0]

All of the following are examples of cost reductions that can result from an acquisition except: A. benefiting from economies of scale when purchasing raw materials. B. increasing the firm's market share. C. lowering office costs by combining job functions. D. allocating fixed overhead across a wider range of products. E. reducing the number of management personnel required.

B. increasing the firm's market share.

Liu Online has agreed to be acquired by Velasco Gaming for 800 shares of Velasco Gaming stock. Velasco Gaming currently has 7,500 shares of stock outstanding at a price of $28 per share. Liu Online has 1,800 shares outstanding at a price of $12 per share. The incremental value of the acquisition is $1,100. What is the value per share of Velasco Gaming stock after the acquisition? A. $28.47 B. $31.03 C. $28.04 D. $27.52 E. $27.96

C. $28.04

The balance sheet of Van Tho Corporation reflects current assets of $6,000, net fixed assets of $8,400, current liabilities of $1,800, long-term debt of $1,100, and equity of $11,500. Meanwhile, the balance sheet of TravelWare shows current assets of $2,000, net fixed assets of $3,300, current liabilities of $900, long-term debt of $500, and equity of $3,900. The fair market value of TravelWare's fixed assets is $4,100 versus the $3,300 book value shown. Also, assume Van Tho pays $5,200 for TravelWare and raises the needed funds through an issue of long-term debt. Assume the purchase method of accounting is used. The post-merger balance sheet of Van Tho will have total debt of ________ and total equity of ________. A. $14,500; $15,400 B. $10,200; $15,400 C. $9,500; $11,500 D. $1,600; $11,500 E. $1,600; $15,400

C. $9,500; $11,500

Kurt's Entertainment has a receivables turnover rate of 14.8, a payables turnover rate of 10.4 and an inventory turnover rate of 22.6. What is the length of the firm's operating cycle? A. 42.56 days B. 39.80 days C. 40.81 days D. 38.77 days E. 34.89 days

C. 40.81 days Operating cycle = (365/22.6) + (365/14.8) = 40.81 days

Which one of the following is not required for an acquisition to be considered tax-free? A. An exchange that is considered to be of equal value B. The obtainment of equity shares in the acquirer by the target firm's shareholders C. A cash payment to the target firm's shareholders D. A business purpose, other than avoiding taxes, for the acquisition E. The continuity of equity interest

C. A cash payment to the target firm's shareholders

________ risk is the type of equity risk related to a firm's capital structure policy. A. Static B. Systematic C. Financial D. Business E. Market

C. Financial

Which one of the following statements is correct? A. The shareholders of an acquired firm are generally given a choice of accepting either cash or shares of stock when the acquisition is tax free. B. The assets of an acquired firm are recorded on the books of the acquiring firm at their current book value regardless of the tax status of the acquisition. C. If the assets of a firm are written up as part of the acquisition process, the increase in value is considered to be a taxable gain. D. To be a tax-free acquisition, the shareholders of an acquired firm must receive shares in the acquiring firm that are equal to 25 percent or less of the value of the shares held in the acquired firm. E. Target firm shareholders demand a higher selling price when an acquisition is a nontaxable event.

C. If the assets of a firm are written up as part of the acquisition process, the increase in value is considered to be a taxable gain.

A proposed project has an initial cost of $74,200 and cash inflows of $23,900, $34,700, and $40,200 for Years 1 through 3, respectively. The required rate of return is 15.2 percent. Based on IRR, should this project be accepted? Why or why not? A. No; The IRR exceeds the required return. B. No; The IRR equals the required return. C. No; The IRR is less than the required return. D. Yes; The IRR exceeds the required return. E. Yes; The IRR equals the required return.

C. No; The IRR is less than the required return. use financial calculator

Which one of the following does not represent a potential tax gain from an acquisition? A. The use of tax loss carryforwards B. The use of surplus funds C. The increase in taxable income D. The use of unused debt capacity E. The write-up of depreciable assets

C. The increase in taxable income

The length of time a firm must wait to recoup the money it has invested in a project is called the: A. valuation period. B. profitability period. C. payback period. D. internal return period. E. discounted cash period.

C. payback period.

NuParts, Inc., has estimated quarterly sales for next year, starting with Quarter 1, of $15,900, $16,800, $17,500, and $16,400. Purchases are equal to 67 percent of the following quarter's sales and the accounts payable period is 60 days. Assume 30 days in each month. How much will the firm owe its suppliers at the end of Quarter 3? A. $7,506.67 B. $7,816.67 C. $6,933.33 D. $7,325.33 E. $7,066.67

D. $7,325.33 Q3 ending accounts payable = 60/90(.67 ×$16,400) = $7,325.33

Which one of the following statements correctly applies to a merger? A. The merged firm will have a new company name. B. The acquiring firm will acquire the assets but not the debt of the target firm. C. The titles to individual assets of the target firm must be transferred into the acquiring firm's name. D. The shareholders of the target firm must approve the merger. E. The acquiring firm does not have to seek approval for the merger from its shareholders.

D. The shareholders of the target firm must approve the merger.

When valuing an entire firm using the cash flow from assets approach, why must the tax amount be adjusted? A. Taxes must be computed for valuation purposes based solely on the marginal tax rate. B. Only straight-line depreciation can be used when computing taxes for valuation purposes. C. The tax effect of the dividend payments must be eliminated. D. The tax effect of the interest expense must be removed. E. The taxes must be computed for valuation purposes based on the average tax rate for the past ten years.

D. The tax effect of the interest expense must be removed.

The Check Clearing Act for the 21st Century has caused: A. zero-balance accounts to disappear. B. a reduction in collection float, but not disbursement float. C. increased check kiting. D. a reduction in both collection and disbursement float. E. the elimination of all lockboxes.

D. a reduction in both collection and disbursement float.

In a merger the: A. acquiring firm acquires the assets, but not the liabilities, of the target firm. B. shareholders of the target firm have little, if any, say as to whether or not the merger occurs. C. target firm continues to exist but will be a wholly owned subsidiary of the acquiring firm. D. acquiring firm retains its pre-merger legal status. E. legal status of both the acquiring firm and the target firm is terminated.

D. acquiring firm retains its pre-merger legal status.

The purchase accounting method requires that: A. the excess of the purchase price over the fair market value of the target firm be recorded as a one-time expense on the income statement of the acquiring firm. B. the equity of the acquiring firm be reduced by the excess of the purchase price over the fair market value of the target firm. C. the excess amount paid for the target firm be recorded as a tangible asset on the books of the acquiring firm. D. the assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm. E. goodwill be amortized on a yearly basis for financial statement purposes.

D. the assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm.

. Which one of the following commences on the day inventory is purchased and ends on the day the payment for the sale of that inventory is collected? Assume all sales and purchases are on credit. A. Cash cycle B. Inventory period C. Accounts payable period D. Accounts receivable period E. Operating cycle

E. Operating cycle

Which one of the following will reduce the disbursement float of a firm? A. Writing checks on a zero-balance account rather than on the master account B. Mailing a check from a very remote location C. Mailing an unsigned check so that it must be returned for a signature D. Requiring that all checks be held one day before mailing so they can be reviewed by a manager E. Paying a loan payment at the bank rather than mailing a check to the bank

E. Paying a loan payment at the bank rather than mailing a check to the bank

Which statement is true concerning a controlled disbursement account? A. The number of checks that can be disbursed on any one day is limited. B. The total number of checks that can be written in any one month is limited. C. The amount of the disbursements is limited to the amount the firm has available on its bank line of credit. D. The amount that can be disbursed on any given day is limited to the balance in the account when the bank opens in the morning. E. The bank will inform the firm of the amount that needs to be transferred on a daily basis.

E. The bank will inform the firm of the amount that needs to be transferred on a daily basis.

Ignoring bonus depreciation, the net book value of equipment will: A. increase over the taxable life of an asset. B. decrease at a constant rate when MACRS depreciation is used. C. vary in response to changes in the market value of that equipment. D. remain constant over the life of the equipment. E. decrease slower under straight-line depreciation than under MACRS.

E. decrease slower under straight-line depreciation than under MACRS.

Collection policy refers to the: A. process of determining which customers will be granted credit. B. process of determining the probability that customers will not pay. C. set of guidelines used by a firm to determine the cost of offering credit to its customers. D. daily process of handling cash inflows and outflows of cash. E. set of procedures a firm follows in collecting accounts receivable.

E. set of procedures a firm follows in collecting accounts receivable.

Which one of these is the least important factor to consider when comparing the financial situations of utility companies that generate electric power and have the same SIC code? A. Methods of power generation B. Type of ownership C. Government regulations affecting the firm D. Fiscal year end E. Number of part-time employees

E. Number of part-time employees

The depreciation tax shield is best defined as the: A. amount of tax that is due when an asset is sold. B. amount of tax that is saved when an asset is purchased. C. amount by which the aftertax depreciation expense lowers net income. D. tax that is avoided when an asset is sold as salvage. E. amount of tax that is saved because of the depreciation expense.

E. amount of tax that is saved because of the depreciation expense.

Consider a project to supply 70 million postage stamps annually for the next five years. You have an idle parcel of land available that cost $279,000 five years ago; if the land were sold today, it would net you $310,000, aftertax. You estimate the land can be sold for $400,000 after taxes in five years. You will need to install $1,867,000 in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's five-year life. Ignore bonus depreciation. The equipment can be sold for $950,000 at the end of the project. You will also need $32,000 in initial net working capital for the project, and an additional investment of $5,000 every year starting with Year 1. All net working capital will be recovered when the project ends. Your production costs are .21 cents per stamp, and you have fixed costs of $440,000 per year. Assume the tax

A. $.01619

Steele Video has sales of $96,400, costs of $53,800, interest paid of $2,800, and depreciation of $7,100. The tax rate is 21 percent. What is the value of the cash coverage ratio? A. 12.68 B. 23.41 C. 15.21 D. 17.27 E. 12.14

C. 15.21 Cash Coverage ratio = Cash / Interest CCR = (96400-53800) / 2800 CCR = 15.21

Bankruptcy: A. refers to a loss of value for debt holders. B. is an inexpensive means of reorganizing a company. C. is a legal proceeding. D. occurs when total equity is negative. E. occurs when a company cannot meet its financial obligations.'

C. is a legal proceeding.

Lewis & Price Corporation paid $700 in dividends and $320 in interest this past year. Common stock remained constant at $6,800 and retained earnings decreased by $180. What is the net income for the year? A. $180 B. $1,020 C. $1,200 D. $520 E. $880

D. $520 Net income = Dividends paid + Change in retained earnings NI = 700 + (-180) Net income = $520

M&M Proposition II, without taxes, is the proposition that: A. the cost of equity is equivalent to the required rate of return on assets. B. the cost of equity depends on the return on debt, the debt-equity ratio, and the tax rate. C. the size of the pie does not depend on how the pie is sliced. D. a company's cost of equity is a linear function with a slope equal to (RA − RD). E. the capital structure of a company has no effect on that company's value.

D. a company's cost of equity is a linear function with a slope equal to (RA − RD).

Vasquez Pottery has shareholders' equity of $218,700. The firm owes a total of $141,000, only 40 percent of which is payable within the next 12 months. The firm has net fixed assets of $209,800. What is the amount of the net working capital? A. $93,500 B. $149,900 C. $125,600 D. $56,500 E. −$47,500

A. $93,500 Net working capital = current assets - current liabilities NWC = 141,000(0.6) + 218,700 - 209,800 NWC = 93,500

The Corner Bakery has a debt-equity ratio of .53. The required return on assets is 13.5 percent and its cost of equity is 15.8 percent. What is the pretax cost of debt based on M&M Proposition II with no taxes? A. 9.16% B. 8.40% C. 8.78% D. 10.68% E. 7.56%]['

A. 9.16%

Deep Mines has 43,800 shares of common stock outstanding with a beta of 1.54 and a market price of $51 per share. There are 10,000 shares of 7 percent preferred stock outstanding with a stated value of $100 per share and a market value of $83 per share. The 8 percent semiannual bonds have a face value of $1,000 and are selling at 96 percent of par. There are 5,000 bonds outstanding that mature in 13 years. The market risk premium is 7.5 percent, T-bills are yielding 3.6 percent, and the tax rate is 21 percent. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the company's typical project? A. 9.30% B. 9.59% C. 8.72% D. 8.28% E. 9.17%

A. 9.30% E = 43,800($51) = $2,233,800 P = 10,000($83) = $830,000 D = 5,000($1,000)(.96) = $4,800,000 V = $2,233,800 + 830,000 + 4,800,000 V = $7,863,800 RE = .036 + 1.54(.075) RE = .1515 RP = [.07($100)]/$83 RP = .0843 RD = .96($1,000) = [.08($1,000)/2][(1 − {1/[1 + (r/2)]13(2)/(r/2)] + $1,000/[1 + (r/2)]13(2) RD = .0851 WACC = ($2,233,800/$7,863,800)(.1515) + ($830,000/$7,863,800)(.0843) + ($4,800,000/$7,863,800)(.0851)(1 − .21) WACC = .0930, or 9.30%

Projects A and B are mutually exclusive and have an initial cost of $82,000 each. Project A provides cash inflows of $34,000 per year for three years while Project B produces a cash inflow of $115,000 in Year 3. Which project(s) should be accepted if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent? A. Accept B at 11.7 percent and neither at 13.5 percent B. Accept A at both discount rates C. Accept both at 11.7 percent and neither at 13.5 percent D. Accept A at 11.7 percent and neither at 13.5 percent E. Accept B at both discount rates

A. Accept B at 11.7 percent and neither at 13.5 percent

Which one of the following statements is correct? A. An increase in the depreciation expense will not affect the cash coverage ratio. B. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5. C. If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0. D. The debt-equity ratio can be computed as 1 plus the equity multiplier. E.An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.

A. An increase in the depreciation expense will not affect the cash coverage ratio.

Incorporating flotation costs into the analysis of a project will: A. Increase the initial cash outflow of the project. B. have no effect on the present value of the project. C. cause the project to be improperly evaluated. D. Increase the net present value of the project. E. increase the project's rate of return.

A. Increase the initial cash outflow of the project.

Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive? A. Reject Project A and accept Project B B. Accept both projects C. Reject both projects D. Accept Project A and reject Project B E. Accept either one, but not both

A. Reject Project A and accept Project B Find NPV of each (done on calc) Project A NPV= 6288.17 Project B NPV= 7468.93 Since the projects are mutually exclusive, you accept the one with the larger POSITIVE NPV

Project A costs $47,800 with cash inflows of $34,200 in Year 1 and $28,700 in Year 2. Project B costs $63,200 with cash inflows of $21,900 in Year 1 and $59,200 in Year 2. These projects are independent and have an assigned discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects? A. Reject both projects. B. Accept Project B and reject Project A. C. Accept both projects. D. Accept either, but not both projects. ,E. Accept Project A and reject Project B.

A. Reject both projects.

A project has a discount rate of 15.5 percent, an initial cost of $109,200, an inflow of $56,400 in Year 1, and an inflow of $75,900 in Year 2. Your boss requires that every project return a minimum of $1.06 for every $1 invested. Based on this information, what is your recommendation on this project? A. Reject the project because the PI is .97. B. Reject the project because the PI is 1.01. C. Reject the project because the PI is 1.03. D. Accept the project because the PI is 1.03. E. Accept the project because the PI is .97.

A. Reject the project because the PI is .97. NPVInflows = $56,400/1.155 + $75,900/1.155^2 NPVInflows = $105,726.65 PI = 105,726.65/109,200PI = .97

Which one of the following statements concerning stock exchanges is correct? A. Some large companies are listed on Nasdaq. B. Most debt securities are traded on the NYSE. C. The exchange with the strictest listing requirements is Nasdaq. D. Nasdaq is a broker market. E. The NYSE is a dealer market.

A. Some large companies are listed on Nasdaq. False because: B. Most debt securities are traded OTC over the counter C. The exchange with the strictest listing requirements is Nasdaq. - idk I thought this was right, maybe cause it doesn't say Nasdaq Global Select Market fully D. Nasdaq is a dealer market. E. The NYSE is an auction market.

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? A. The cash flow in Year 2 is valued just as highly as the cash flow in Year 1. B. The project's cash flow in Year 3 is discounted by a factor of (1 + R)3. C. The cash flow in Year 3 is ignored. D. The project is acceptable whenever the payback period exceeds three years. E. The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted.

A. The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be? A. Accept Project A because it has the lower required return B. Accept Project B and reject Project A based on the NPVs C. Accept Project A because it has the shortest payback period D. Accept both projects because both NPVs are positive E. Accept Project A and reject Project B based on their AARs

B. Accept Project B and reject Project A based on the NPVs

Matthews Manufacturing is trying to decide between two different conveyor belt systems. System A costs $438,000, has a six-year life, and requires $83,000 in pretax annual operating costs. System B costs $369,000, has a five-year life, and requires $92,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 23 percent and the discount rate is 14.2 percent. Which system should the firm choose and why? A. B: The net present value is −$490,696. B. B; The net present value is −$553,041. C. B; The net present value is −$608,222. D. A; The net present value is −$398,516. E. A; The net present value is −$547,836.

B. B; The net present value is −$553,041.

Which one of these statements related to Chapter 11 bankruptcy is accurate? A. Prepacks apply only to Chapter 7, not Chapter 11, bankruptcies. B. Companies sometimes file for Chapter 11 in an attempt to gain a competitive advantage. C. A company can only file for Chapter 11 after it becomes totally insolvent. D. Senior management must be replaced prior to exiting a Chapter 11 bankruptcy. E. Chapter 11 involves the total liquidation of the bankrupt firm.

B. Companies sometimes file for Chapter 11 in an attempt to gain a competitive advantage.

Which of the following statements regarding the aftertax cost of debt is accurate? A. It is unaffected by changes in the market rate of interest. B. It varies inversely with changes in market interest rates. C. It will generally equal the cost of preferred stock if the tax rate is zero. D. It will generally exceed the cost of equity if the relevant tax rate is zero. E. It is highly dependent upon a company's tax rate.

B. It varies inversely with changes in market interest rates.

A ______ has all the respective rights and privileges of a legal person. A. sole proprietorship B. corporation C. limited partnership D. limited liability company E. general partnership

B. corporation

Corporate bylaws: A. must be amended should a firm decide to increase the number of shares authorized. B. determine how a corporation regulates itself. C. describe the intended life and purpose of the organization. D. cannot be amended once adopted. E. define the name by which the firm will operate.

B. determine how a corporation regulates itself.

Cash flow from assets is also known as the firm's: A. capital structure. B. free cash flow. C. historical cash flow. D. equity structure. E. hidden cash flow.

B. free cash flow.

As the degree of financial leverage increases, the: A. less debt a firm has per dollar of total assets. B. probability a firm will encounter financial distress increases. C. accounts payable balance decreases. D. amount of a firm's total debt decreases. E. number of outstanding shares of stock increases.

B. probability a firm will encounter financial distress increases.

When determining a firm's weighted average cost of capital, the item with the least amount of impact is the: A. company's marginal tax rate. B. standard deviation of the company's common stock. C. coupon rate of the company's outstanding bonds. D. growth rate of the company's dividends. E. company's beta.

B. standard deviation of the company's common stock.

The flotation cost for a company is computed as: A. the geometric average of the flotation costs associated with each form of financing. B. the weighted average of the flotation costs associated with each form of financing. C. the arithmetic average of the flotation costs of both debt and equity. D. one-half of the flotation cost of debt plus one-half of the flotation cost of equity. E. a weighted average based on the book values of the company's outstanding securities.

B. the weighted average of the flotation costs associated with each form of financing.

M&M Proposition I with tax implies that the: A. cost of equity increases as the debt-equity ratio decreases. B. weighted average cost of capital decreases as the debt-equity ratio increases. C. cost of capital is the same regardless of the mix of debt and equity used D. value of a company is inversely related to the amount of leverage used by that company. E. value of an unlevered company equals the value of a levered company plus the value of the interest tax shield.

B. weighted average cost of capital decreases as the debt-equity ratio increases.

Boutique Marketing has total debt of $4,910 and a debt-equity ratio of .52. What is the value of the total assets? A. $16,128.05 B. $7,253.40 C. $14,352.31 D. $9,571.95 E. $11,034.00

C. $14,352.31 Total Assets = Total Debt + (Total Debt / Debt Equity Ratio) Total Assets = 4910 + (4910 / 0.52) Total Assets = $14,352.31

Parsa's Organics currently has $56 in debt for every $100 in equity. If the company were to use some of its cash to decrease its debt, while maintaining its current equity and net income, which one of the following would decrease? A. Return on equity B. Total asset turnover C. Equity multiplier D. Return on assets E. Net profit margin

C. Equity multiplier

Which one of the following methods of analysis provides the best information on the benefits to be received from a project per dollar invested? A. Payback B. Average accounting return C. Profitability index D. Net present value E. Internal rate of return

C. Profitability index

Which one of the following is the best example of two mutually exclusive projects? A. Building a furniture store beside a clothing outlet in the same shopping mall B. Promoting two products during the same television commercial C. Waiting until a machine finishes molding Product X before being able to mold Product Z D. Using an empty warehouse to store both raw materials and finished goods E. Producing both plastic forks and spoons on the same assembly line

C. Waiting until a machine finishes molding Product X before being able to mold Product Z

To determine a firm's cost of capital, one must include: A. the weighted costs of all future funding sources. B. the company's original debt-equity ratio. C. the returns currently required by both debtholders and stockholders. D. only the return required by the firm's current shareholders. E. only the current market rate of return on equity shares.

C. the returns currently required by both debtholders and stockholders.

Watson Landscaping is considering a project that will require additional inventory of $12,000 and will increase accounts payable by $19,000. Accounts receivable is currently $302,000 and is expected to increase by 5 percent if this project is accepted. What is the project's initial cash flow for net working capital? A. −$15,900 B. −$22,100 C. −$8,100 D. −$31,000 E. −$46,900

C. −$8,100

The income statement of Lashari Design shows depreciation of $1,611, sales of $21,415, interest paid of $1,282, net income of $1,374, and costs of goods sold of $16,408. What is the amount of the noncash expenses? A. $2,351 B. $1,282 C. $740 D. $1,611 E. $2,893

D. $1,611 Non cash expenses = Depreciation Non Cash expenses = $1,611

A proposed expansion project is expected to increase sales by $74,300 and increase cash expenses by $46,900. The project will require $52,800 of fixed assets that will be depreciated using straight-line depreciation to a zero book value over the five-year life of the project. The store has a marginal tax rate of 23 percent. What is the operating cash flow of the project using the tax shield approach? Ignore bonus depreciation. A. $14,098.20 B. $22,800.10 C. $17,916.60 D. $23,526.80 E. $11,114.40

D. $23,526.80

The Daily Brew has a debt-equity ratio of .57. The firm is analyzing a new project that requires an initial cash outlay of $260,000 for equipment. The flotation cost is 9.1 percent for equity and 4.4 percent for debt. What is the initial cost of the project including the flotation costs? A. $333,333 B. $302,400 C. $318,924 D. $280,758 E. $256,700

D. $280,758 Average flotation cost = (1/1.57)(.091) + (.57/1.57)(.044) Average flotation cost = .0739, or 7.39% Initial cost = $260,000/(1 − .0739) Initial cost = $280,758

Theresa's Flower Garden has 650 bonds outstanding that are selling for $1,007 each, 2,100 shares of preferred stock with a market price of $68 per share, and 42,000 shares of common stock valued at $44 per share. What weight should be assigned to the preferred stock when computing the weighted average cost of capital? A. 5.75% B. 5.00% C. 6.67% D. 5.40% E. 6.08%

D. 5.40% D = 650($1,007) = $ 654,550 P = 2,100($68) = $ 142,800 E = 42,000($44) = $ 1,848,000 V = $654,550 + 142,800 + 1,848,000 V = $2,645,350 WP = $142,800/$2,645,350 WP = .0540, or 5.40%

National Home Rentals has a beta of 1.06, a stock price of $17, and recently paid an annual dividend of $.92 per share. The dividend growth rate is 2.2 percent. The market has a rate of return of 11.2 percent and a risk premium of 7.3 percent. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model? A. 10.30% B. 8.67% C. 10.05% D. 9.68% E. 9.13%

D. 9.68% Re = (.112-.073) + 1.06 (.073) = .116383. RE = {[.92(1.022]/17} +.022 = .077314. (.11638+.07731)/2 = .0968